I enjoyed yesterday's Real Money discussion on Deutsche Bank (DB) with strong contributions from Tim Collins, Kevin Curran and Doug Kass, who believes Deutsche is the next Black Swan for global financial markets. I believe all those esteemed gentlemen missed the salient point on Deutsche after its share's amazing decline, though. Deutsche is now trading at 31% of tangible book value. Yes, that is not a typo, DB is trading at a 69% discount to tangible book.
So, the market is gaining Deutsche credit for less than 33 cents on every euro (I use the German share price of €8.04 to weed out currency concerns) of net assets, and the question has to be: Is that too cheap to ignore? On a 9/30/2018 tangible book value of $53.08 (the same measurement point as DB's) J.P. Morgan is getting a 2.0x multiple on book value. Goldman Sachs (GS) may be a better compatible for Deutsche, and after GS stock's recent slide the market is according it a price to book ratio of 1.0x on its 9/30/2018 tangible book value of $191.71.
The bond market certainly has noticed, as Deutsche's benchmark 4/2025 dollar-denominated bond is trading at 87.25 cents on the dollar today and yielding 7.03%. Deutsche is barely holding onto the last notch of investment grade status, with current ratings of BBB- from Standard & Poors and Baa3 from Moody's.
Deutsche's current equity market capitalization is just under $19.2 billion and that may be the ultimate counter to Doug Kass's Black Swan argument. The real risk for Deutsche shareholders isn't a balance sheet blow-up, it is a continuing fade into oblivion.
Deutsche's problems are myriad, and this week's revelations of raids by German investigators at Deutsche's headquarters searching for evidence in cases linked to the Panama Papers money-laundering scheme certainly does not help. At the end of the day, though, Deutsche is a relatively strong German consumer and commercial bank that has an underperforming investment bank attached to it. That relationship is getting more tenuous as senior management in Frankfurt cuts investment banking and trading staff aggressively in an effort to manage risk.
Deutsche's balance sheet is mainly composed of mortgages to German individuals (34% of the loan book) and other loans to high net worth individuals and consumers combine for another 19% of the loan book. Germany's housing market has been booming in 2018 with Europace AG reporting a 7% increase in its home price tracking index. So, there is no wealth effect crisis in Germany at the moment, and the popular press has been focused on lame duck Chancellor Merkel's failure to deliver more affordable housing units, another sign that demand is outstripping supply.
So, Deutsche is solvent, extremely solvent actually, but I just keep going back to David Faber on CNBC during the Lehman crisis and his daily lectures on the difference between liquidity and solvency.
As presented under IFRS accounting DB's balance sheet was fulsome with cash on 9/30. DB's accounts showed a consolidated cash balance of €201.2 billion euros, down 11% thus far in 2018 but up from the June 30th figure. That figure also dwarfs DB's long term-debt figure of €152 billion at 9/30.
Both the bond market and the stock market are telling us that they don't care about DB's 9/30 liquidity figures, though. Clearly Deutsche's common equity tier one (CET1) ratio of 14.0% and total capital ratio of 18.0% are not being valued by the market. Deutsche does buy back shares, but only in small amounts (last fiscal year's buybacks totaled 22.8 million shares out of a base of 2.1 billion) and those shares are used for employee compensation programs, not retired, so there is no anti-dilutive impact from the buybacks.
And that's the problem with Deutsche: the bank is being run by fearful individuals. Management could hugely accrete its equity by buying back shares at 31 cents on the euro, but liquidity concerns and low credit ratings make that option unpalatable.
So, Doug is wrong. Deutsche's going to survive. But with a market value that is 87% lower than Goldman's, the real question is: who cares? Tim pointed out that Deutsche's ADR, now quoted at $9.12, was trading at over $100 per share in 2007. He's right, and, believe me, my friends who work at DB are acutely aware of that fact. Just like GE (GE) , IBM (IBM) , Ford (F) and so many other fallen angels, though, the real systemic risk of Deutsche's implosion has long since been priced out by the markets.
I have no idea if Deutsche is too big to fail--though the signs of failure are in no way imminent--but I am quite sure that Deutsche is too small to matter. So, I am not bottom-fishing with DB stock.